1. Domestic Resource Mobilization in Tanzania N. Osoro, L. Rutasitara, J. Aikaeli and G. Kibira rutasitara@udsm.ac.tzrutasitara@udsm.ac.tz, rutasitara@live.com, osoro@udsm.ac.tz, Department of Economics, University of Dar es Salaamrutasitara@live.comosoro@udsm.ac.tz MKUKUTA REVIEW STUDIES, MINISTRY OF FINANCE AND ECONOMIC AFFAIRS 25-02-2010 1

2. Outline 1.Introduction II.Revenue Sources from Domestic Taxes III. Financing by Non-traditional (Non-tax) Domestic Resources IV.Tax Revenue from the Informal Sector V.Overall Assessment VI.Concluding Remarks and Recommendations 2

3. I. Introduction Why Focus on Domestic Resources Mobilisation? Objectives Methodology 3

4. II.Revenue Sources from Domestic Taxes Impacts of Internal and External Shocks on Govt Revenue Sectoral Contribution to GDP and Revenue Collection Contribution of Tax Revenue by sector Estimates of Revenue Losses due to Tax Relief Possible internal and external shocks Strategies for Improving revenue collection 4

5. Impact of Internal and External Shocks on Govt. Revenue An event that produces a significant change within the economy Cause unpredictable changes on aggregate demand and shirt run aggregate supply 5

6. Impact of Internal and External Shocks on Govt. Revenue (cntd) Internal (Changes in weather, power, c hanges in tastes of consumers) External (changes in food and oil prices, export prices, global economic and financial crisis) 6

7. Sectoral Contribution to GDP 7

8. Contribution to Tax Revenue by Sector 8

9. Growth in Sectoral Contribution to GDP 9

10. Estimates of Revenue Losses From Relief Schemes 10

11. Trend on the Exemption as Share of GDP and Tax Revenue in Tanzania for 1996-2008 11

12. Remaining Tax Revenue Improvement Exploit property tax Reducing dependence on trade taxes Enhance revenue collection through tax information and education Review tax relief policy Enforce compliance Widening the tax base vs raising tax rates 12

13. III Financing by Non-traditional (Non-tax) Domestic Resources Overview of Non-tax Revenue Collection Non-tax Financing Space – Non-traditional Financing Options in Tanzania – Potential Resources for Mobilization by the New Non-traditional Options Where the Government Can Use Non-Traditional Financing Options 13

14. Overview of Non-tax Revenue Collection Developments of Non-tax Revenue Collection 14

15. Non-tax Financing Space Non-traditional Financing Approaches -Initial Public Offerings Underwriting -Public-Private-Partnership Engagement - A Case of India’s PPP Development Strategy -The World Bank Study on PPP for Urban Water Utilities -Build-Operate-Transfer (BOT) Assignment -South Africa’s Case Study 15

16. Where the Government Can Use Non- Traditional Financing Options infrastructure as the first priority area - energy and water resources, transport Why: – the government cannot do all at one time; – resources scarce; – crossing cutting in terms of growth potential. 16

17. IV. Tax Revenue from the Informal Sector Scope of Informal Section of the Economy – low entry costs, and general ease of entry; – unregulated and competitive markets; – reliance on indigenous resources; – family ownership of enterprises; small scale operation; – labour intensive and simple technology; – skills acquired outside formal schooling system. 17

18. Estimating Unexploited Potential Revenue from the Informal Sector 18

19. Analysis of Tax Payers 19

20. Strategies to Collect Taxes from the Informal Sector Addressing Constraints to Effective Assessment and Collection of Tax from the Informal Sector – Lack of records, lack fixed premises, multiplicity of taxes, corruption, “high” tax rates, inadequate public services (roads, waste collection – Strengthen tax administration (transparency in public spending, design incentives to attract IF to formal sector 20

21. – Reduce the Burden on SME Taxpayers to Make Formalising Attractive – Institutional Requirements for Effectiveness Tax Policy Measures Tax Administration Measur es 21

22. Overview/reflective Macroeconomic framework Danger of regressivity of the revenue measures Domestic resource mobilization in the light of the ongoing financial crisis Potential role of private sector and community contributions Widening tax bases to the natural resources- based activities 22

23. Recommendations Enhance tax revenue collection Exploit property tax potential Enforce tax payment compliance Review tax relief policy Enhance revenue collection trough provision of proper tax information and education Expand the tax base instead of raising tax rates. Review tax legislation to address ambiguities in some tax laws 23

24. Recommendations (cntd) Non-traditional financing options Organize Local Loans Syndications Engage in Public-Private-Partnership (PPP) Assign Build-Operate-Transfer (BOT) projects Use Initial Public Offerings (IPOs): 24

25. Recommendations (cntd) Strengthen formalization Improve the business environment for the SMEs to attract informal operators Improve presumptive tax system with clearly articulated incentives for compliance and fair penalties. 25